Hong Kong banks may be allowed to run renminbi business in the SAR, including yuan deposits, the People's Bank of China Governor Dai Xianglong said at the Chamber's Distinguished Speakers Series dinner on February 18.

"We know that the renminbi is widely used in the Hong Kong SAR and the Macau SAR. My view is that we will consider allowing local banks in Hong Kong to take renminbi deposits," Mr Dai told the 650 guests attending the dinner.

Mr Dai's comments are the most explicit indication by a senior Chinese official that Hong Kong will be the place where China attempts to speed up its currency liberalisation.

Following his comments, local bankers said such a breakthrough was unlikely to happen this year given the weak Japanese yen.

The People's Bank of China governor also said the current renminbi exchange rate level is reasonable and that there was no need to devalue the currency.

"At the moment, the renminbi exchange rate level is reasonable. The Chinese renminbi will remain stable and I do not see the need to devalue it," Mr Dai said.

Asian countries are worried that China might devalue its currency because of the fall in the Japanese yen, despite China standing by its pledge to keep the yuan stable since the 1997-98 Asian economic crisis.

But Mr Dai was quoted in Hong Kong's Chinese daily, the Wen Wei Po, saying that "the yen's depreciation will do no good to Japan, meanwhile, it has created some pressure on the renminbi exchange rate."

China's growing foreign exchange reserves, which Mr Dai said stood at US$217.4 billion at the end-January, a rise of US$5.24 billion from the end of December, would help maintain the renminbi's stability.

In his speech, the Governor also said China's financial enterprises need to accelerate their reforms to meet challenges brought about by China's entry into the WTO.

China's big four state-owned commercial banks aim to cut their non-performing loan (NPL) ratio to around 15 per cent by the end of 2005, he said.

The NPL ratio of the big four banks -- Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank -- was 25.37 per cent at the end of last year.

Hong Kong banks can play a key role in helping Mainland banks improve their competitiveness and "we especially welcome Hong Kong's senior financial management talent to take up responsible posts in Mainland banks," he said.

Q: You mentioned that you will accelerate financial reform in the banking sector, which will involve overcoming a lot of barriers. My question is, do you have enough qualified financial staff to perform this important task?

Governor Dai: The financial sector, including the banking sector, has a large pool of qualified staff, but I believe we must also look at improving our incentive mechanism. Therefore, we will first reform the remuneration system in the banking sector, particularly for high-calibre senior financial executives, and we will increase their wages. We will also make a strategic plan to train the Mainland's financial executives. For example, we now send and will continue to send senior executives to be trained overseas, that includes Hong Kong, Singapore and the U.S. In addition, we will work at attracting some financial executives from overseas to work in China. Of course we also welcome financial executives from the Hong Kong SAR who can come to China to be president of their China branch, or join the headquarters of some other banks, including Mainland banks. So I would like to welcome the financial executives from Hong Kong to join the management of the Mainland's financial institutions.

Q: You mentioned in your speech that China would push forward steadily its plan for the convertibility of the renminbi, and you mentioned that it needs to be done cautiously. Can you share with us what needs to be done financially and economically to achieve the full convertibility of the renminbi and in your opinion, what is a reasonable timetable to achieve this?

Q: Foreign banks expect a great deal from China's WTO commitments with regards to the opening of the banking sector. Our bank's customers are mainly joint-venture companies in China and there is a huge demand for renminbi lending. But due to restrictions on the number of branches foreign banks' can open, we can only take a limited amount of renminbi from depositors. Under such conditions, would you consider allowing foreign banks to issue bonds denominated in renminbi? Or under what conditions would you allow banks to offer renminbi denominated bonds?

Governor Dai: About 40 branches owned by foreign banks can conduct renminbi business in Shanghai and in Shenzhen, but as you said, their renminbi business is restricted to joint-venture companies. We have offered a great channel for foreign banks to raise renminbi, for example, they can raise renminbi to extend loans. I can tell you that the value of renminbi deposits of foreign banks is only about 18 billion renminbi, but the loans extended by these banks amounts to about 40 billion renminbi. Based on this, I don't think they face great difficulty in extending renminbi loans. But with regards to issuing bonds in renminbi, because China has some restrictions on financial institutions allowed to issue bonds -- even Chinese institutions [this, for the present, is unlikely]. But I will listen carefully to your proposal and consider it very seriously. My personal view is that in five years' time all foreign banks will be treated the same as Chinese banks, so they will be able to do renminbi business, including with individuals in China.

Q: The Hong Kong SAR and Mainland China have been busy discussing a proposed Closer Economic Partnership Arrangement. For a bank to open a branch office in the Mainland, current regulations say it must have total assets of at least US$20 billion for the year before application. But because Hong Kong banks are small in size, does this also apply to Hong Kong banks?

Governor Dai: I receive many delegations at the People's Bank from Hong Kong who suggest we lower this requirement, and I have very seriously considered their proposal. Why we cannot relax this requirement for Hong Kong banks is because of China's WTO commitments. If we lower this requirement for Hong Kong, other countries or territories in the WTO may also ask us to lower this requirement. We have explained this situation to Hong Kong banks and they understand our stance and position. I think the arrangement for integrating trade relations between the two territories will strengthen our competitiveness and relations in the banking sector, and I think this is one issue which can be discussed under such a bilateral trade agreement.

Q: I am an MBA student at the Hong Kong University of Science and Technology. My question is how do you evaluate the employment prospects of MBA students in China's financial sector after WTO and do you think students -- including students from Hong Kong -- would be welcomed in the banking sector?